Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Sears Implosion will hurt everybody including Pensioners and Stockholders

The slow-moving catastrophe known as the retail apocalypse will destroy many lives and lives’ work. Stockholders, pensioners, and communities can be wiped out by the mass die-off of retail stores.

The human cost of the retail apocalypse is on display in Canada where 16,000 Sears Canada retirees will see their pension benefits cut, The Star reported. The cuts will occur because the pension fund for the now-defunct Sears Canada is underfunded by $266.80 million.

Disturbingly the Sears Canada pension fund had a $65 million surplus as recently as 2004. Then Eddie Lampert bought the company in 2005 and Sears Canada paid $3.4 billion in dividends to shareholders between then and 2013. The biggest shareholder was Lampert himself. Either way, Eddie has become the poster child for greedy and insensitive financiers.

Sears Pension Benefits will be cut

Most of the dividend yield came from selling off Sears Canada assets such as Sears Credit and Financial Services, The Star reported. Cynics would say Lampert looted the company, skeptics would say he ran it into the ground.

Sears Canada retirees may see a 20% cut in their pension income, The Star reported. Those outside Ontario will be worse off because that province at least has a Pension Benefit Guarantee Corporation (PGBC) that pays up to $1,500 a month who lose their pensions.

Sears USA is next

American Sears pensioners may soon find themselves in the situation. Sears Holdings (NASDAQ: SHLD) had a $1.6 billion shortfall in its pension fund, USA Today reported in March 2017.

What’s truly frightening is that Sears has no way to cover that shortfall. Its revenues fell by 27.22% during 3rd quarter 2017, Stockrow reported. Sears is operating at a loss; it reported an operating loss of $419 million and a net loss of $558 million on Halloween Day, 2017.

Sears now lacks the money to run its stores, so one has to wonder how it is supposed to cover the pension fund loss. Actually, there is a way the company can simply sell off its assets which were $8.193 billion on 31 October 2017.

It can use the cash from that sale to pay off its liabilities which are $5.643 billion and restructure the $4.650 billion debt. The debt can probably be restructured in such a way as to leave enough over to cover the pension obligations.

Even then it will be close because the total amount of Sears’ liabilities and debt is $10.293 billion or more than the company’s assets. Something has to be done because there are tens of thousands of Sears retirees, around 20,000 of them communicate with the National Association of Retired Sears Employees (NARSE).

Sears pensions in the US will undoubtedly be cut – the only question is: by how much. The federal Pension Benefit Guarantee Corporation (PBGC) is supposed to provide at least some pension income after a company collapses, but it is usually less than what was promised.

Will the Sears Catastrophe be repeated?

The disaster at Sears should serve as a warning because there are lots of dying retailers out there. Many of which owe millions or billions in deferred pension obligations that will never be met.

We might soon be facing a situation in which millions of retired retail workers see their pensions cut or eliminated. These people will have nothing to live on but Social Security and the effects will be felt far beyond their bank accounts.

Communities will be hurt because retirees will have less money to spend. There will be less sales and property tax money and fewer community services. Families will be impoverished and real estate values will plummet as many retirees sell their houses in an attempt to replenish empty bank accounts.

What happens if other retailers like JC Penny’s (NYSE: JCP), Macy’s (NYSE: M) or Target (NYSE: TGT) collapse? What about the supermarket operators; especially Safeway, which is now privately held? Will the PGBC have enough money to cope?

The PGBC Multiemployer Programs which cover employers like Sears are already fatally underfunded. PGBC Director Thomas Reeder told Congress that the program has projected obligations of $67.30 billion and $2.3 billion in assets in November, The Hill reported.

 

Reeder thinks the PGBC might become insolvent by the end of 2025 under the present level of funding. The organization that guarantees pensions is out of money without Sears or the other dying retailers figured in.

Congress needs to Increase Social Security and Address Pensions now

Why isn’t Congress talking about this train wreck or trying to do something about it?

There are some things that can be done including raising Social Security payments to $2,000 a month for those with no other source of income; or forcing employers to convert all defined benefit pensions to annuities as is done in the United Kingdom. Since annuities are insurance products that have nothing to do with a specific company they can survive if an employer goes out of business.

Another obvious suggestion would be to fully fund the PBGC. One way to get the money for that would be with a tax on online sales. Since online retailers like Amazon are driving brick and mortar stores out of business they should cover the costs of that transformation.

We need to face the reality of the retail apocalypse and the fact that defined benefit pensions are dead. If we do not millions of pensioners face a bleak future and many politicians will lose their jobs.

The effects of the Retail Apocalypse go far beyond empty stores. We need to face the fact and address the problems it creates before it sparks massive political upheavals that will dwarf that which took President Donald J. Trump (R-New York) to the White House.